When choosing home loans home buyers are presented with a choice of borrowing formats. They can either select repayment home loans or interest only home loans. Repayment home loans involve the home owner creating monthly repayments where the amount repaid includes the interest charged for that month AND a small percentage of the capital. Interest only home loans, as their title suggests, involves the home owner creating repayments of the interest only each month. The home owner is then required to choose an investment vehicle to generate up a lump sum that can be used to pay off the capital in one hit at the end of the home loan term.

Why choose interest only home loans?

Interest only home loans offer several advantages to the homeowner. The most apparent benefit of an interest only home loan is the fact that monthly repayments will be lower than on repayment home loans. This is because the home owner does not pay off any of the capital each month, leaving the home loans debt at exactly the same level at the finish of the loan term as it was at the beginning.

To illustrate this advantage lets take home loans of 100,000 and set the repayment terms over 25 months at the current standard variable interest rate, which is typically 6.75%. For repayment home loans the borrower would be building interest & capital repayments of around 700 each month. On an interest only mortgage however the borrower would only have to repay 562.50 in interest. Thats a saving of 137.50 each month!

If youd be struggling to meet the monthly costs of repayment home loans because of a low income, but figure that your income will go up in future years then acquiring out an interest only home loan could be ideal! Additionally, should you choose an interest only mortgage product where early repayment / overpayment of the interest is allowed, if only up to a certain percentage, then as your income builds you will actually increase your chances of paying off your mortgage early. One important point here though; if you do intend to aim for early home loan repayment youll positive need to generate sure that the investment vehicle you make use of to pay off the capital grows enough to meet the capital debt in instant.

Other advantages of interest only home loans are tied up in the investment vehicle itself. This is because, being an investment, it might grow more strongly than anticipated and leave you with a lump sum even after the capital on the home loan is repaid. However, it is only right to mention that being an investment it could under perform too, and so is no guarantee that it will grow sufficiently to pay off the capital owing on a borrowers home loans.